RHB FIC Credit Market Update - 8/6/15

8 June 2015

Credit Market Update

                                       

Yields Widened on Strong US Data; Exim Malaysia Printed USD Bonds; Value in FIRTSP 5/18 SGD 

REGIONAL                                                                                      

¨      Risk premium and yields widened ahead of NFP. Risk premiums in the region rose, as indicated by the iTraxx AxJ IG widening 1.5bps to 110 as stronger jobs data tipped off expectations for a stronger non-farm payroll (NFP). The NFP which was released Friday night came in stronger than expected at 280k (prior: 221k; surveyed: 226k), causing yields on the 10y UST to widen 10bps to a YTD-high of 2.41% and reinforcing the view for the Fed to begin its rate hike in September. Key data in focus this week will be the US retail sales and preliminary consumer sentiment as investors gauge the Fed’s stance for next week’s FOMC meeting. Secondary trading was slow prior to NFP release, but leaned towards profit-taking for long-dated Chinese papers like the TENCNT complex, HRAM 20-25 and CNOOC 24. Meanwhile, tighter yields were seen in commodity issuers like FMGAU 22, BHP 23, 42 and 43c20, and WPLAU 25. In the primary, Zhongrong Intl Trust announced 3y IPT at 6.25%. Fitch assigned LT foreign currency rating of A+ to Tencent (TENCNT, A2/A/A+).

¨      Quieter SGD trading ahead of NFP; Interest in IG names. The short-to-mid curves were largely unchanged, with only the 3y marginally tightening by 0.75bps (to 1.75%) and the 5y staying at 2.22%. Trading was slightly quieter on Friday as investors awaited the release of US May NFP numbers, which came out better than expected. Meanwhile, trading was seen in IG names such as STSP and HDBSP while some buying was also seen on recent prints such as BTHSP. In the primaries, Keong Hong Holdings (NR), a Singaporean contractor, printed a 3y SGD50m at a final price of 6%.

¨      On rating movement, Moody’s concluded the rating for Thailand and Hong Kong banks, following the new bank rating methodology (refer to Table 4). Notably, senior debts of 3/4 largest banks in Thailand were downgraded by a notch to Baa1 (except for Krung Thai Bank).  

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MALAYSIA

¨      GG yields moved higher, tracking MGS curve; April trade surplus narrowed to MYR6.89bn. The MGS curve extended its steepening trend amid good US employment and NFP data - which likely to convince the Fed to hike interest rate sooner than later. Notably, the 10y MGS 9/25 surged 6bps higher to settle at 4.03%, following weak demand of its MYR3bn auction which registered low BTC of 1.67x. In line with the increase in govvies yields, we note mild widening in some government guaranteed papers such as DanaInfra, BPMB and 1MDB. Overall, corporate flows improved to MYR792m, after sluggish activity in early of week. On the primary market, Grand Sepadu priced MYR210m bonds, separated in three trances – 5y at 4.75% (MYR60m), 8y at 5.05% (MYR90m) and 12y at 5.35% (MYR60m). Elsewhere, EXIM Malaysia printed USD90m – 4y at 2.45% (USD40m), 5y at 2.7% (USD50m). Meanwhile, Malaysia’s trade balance surplus narrowed to MYR6.89bn in April (from MYR7.82bn in Mar), where our economist expect current account surplus for 2015 to decrease significantly to 2.3% of GDP (from 4.6% in 2014).

TRADE IDEA: SGD

Bond(s)	FIRTSP 5/18 (yield: 3.69% ; SOR+190bps)(NR)(outstanding: SGD100m)
Comparable(s)	SUNSP 2/20 (yield: 2.96%; SOR+70bps)(Baa2)(outstanding: SGD310m)
Relative Value	We reiterate a preference for FIRTSP 5/18, a healthcare REIT with strong exposure in Indonesia (c.95% of revenue), due to its stable expected cash flows and cheaper valuations. If compared to SUNSP 2/20, and allowing for a 2y difference in duration, we opine that FIRTSP 5/18 should provide a pick-up of around 20-30bps.
Fundamentals	We believe that FIRST REIT has strong fundamentals and outlook due to:  1)     Robust credit fundamentals. If compared to its SG REIT peers, it has a healthier credit profile, with leverage at 32.7% (peers: 34%), Total Debt/ EBITDA at 4.55x (peers: 9.3x) and EBITDA Interest Coverage at 5.4x (peers: 4.6x). 2)     Stable cash flows. It has stable cashflows as it has full occupancy rates and long lease rental agreements (averaging 11.2 years) with the hospital operator, Siloam Hospitals. As most of its operations are in Indonesia, the REIT is insulated from forex fluctuations as the Indonesian rental agreements are structured in SGD. 3)     Strong franchise supported by established sponsor. Siloam Hospitals is owned by PT Lippo Karawaci Tbk, an established property developer in Indonesia, who is also the largest shareholder in FIRST REIT at 27.7%. Though we acknowledge the presence of concentration risk, we believe that the underlying stable demand for healthcare and the established business of PT Lippo Karawaci should moderate any concerns in this area.